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Editorials represent the institutional view of the newspaper. They are written and edited by the editorial staff, which operates separately from the news department. Editorial writers are not involved in newsroom operations.

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Editorial: SC income taxes aren't as high as they look. Cutting them now would be risky.

SCHouse

SC Gov. Henry McMaster is asking the Legislature to cut income taxes by $177 million next year, increasing to $1 billion a year in five years.

If you’ve moved to South Carolina recently, you probably already know that taxes aren’t particularly high here.

If you’ve been here a while, Gov. Henry McMaster’s annual call to cut them is a good occasion for a reminder.

There’s not a perfect way to compare our taxes with other states, but the anti-tax Tax Foundation offers the best measures around. Its Tax Freedom Day marks the day each spring when we’ve earned enough money to pay all of our local, state and federal taxes. The most recent data, based on 2019 tax rates, put South Carolina’s Tax Freedom Day on April 10 — which is six days earlier than the national date.

The Washington lobbying group calculates that, on average, South Carolinians pay 8.9% of their income in state and local taxes. That’s lower than all but 10 other states.

Some of our taxes are on the high side (the sales tax, for instance, and alcohol taxes). Some are on the low side (gasoline, cigarettes). Others look really high but aren’t.

And that brings us to Mr. McMaster’s annual “our income tax is too high” proclamation.

Mr. McMaster argues that South Carolinians pay too much in income taxes, although at an average of $924 per capita in the most recent comparison, we pay less than people in 31 of the 49 other states.

Mostly, though, he argues that at 7%, our top tax rate is too high, and that it “makes South Carolina less competitive for new jobs and capital investment.” He’s right about the rate being high, and he might be right about the competitive disadvantage, although he did make those comments Monday right after justifiably bragging about how great our economy’s doing.

But the fact is that nobody actually pays 7% of their income in state taxes. Check your most recent tax returns if you don’t believe that. On average, South Carolinians pay about 2% of their personal income in state income taxes. Even people with the very highest incomes don’t pay anything near 7%.

South Carolina’s rates are high because the Legislature has chosen to calculate income taxes by using our federal taxable income rather than our total income or even our gross federal income as the starting point. This makes it much easier for us to fill out our state tax returns, but that's a much lower starting point than most states use. The result is that we’re applying our high tax rate to a much smaller portion of our income than people in other states. (A 7% tax on $10,000 generates the same amount of money — $700 — as a 3.5% tax generates on $20,000.)

If your primary goal is to make South Carolina’s income tax rate more attractive on the simplistic income tax comparisons that businesses sometimes use to narrow down location prospects, the way to do that isn't to reduce the relatively small amount of money our state collects in income taxes. It's to raise the starting point for calculating S.C. income taxes, so we can apply a lower tax rate to our now-higher taxable incomes, like other states do.

If you’re convinced that South Carolinians’ overall state and local tax burden should be lower than our current 11th lowest in the nation, it would make more sense to lower the taxes that are actually high. Of course, we wouldn’t advocate lowering alcohol taxes, because it makes sense to tax people higher for behavior that leads to our high DUI death rates; and nobody seems to mind paying those high sales taxes.

The Legislature has an unprecedented amount of one-time funding to spend this year, thanks to last year’s federal COVID relief package and our lawmakers’ prudent decision to underspend in the current year’s budget given uncertainties about the pandemic. But while you can use one-time money for one-time rebates (which we don’t recommend), it's irresponsible to use one-time money for permanent tax cuts, just like it's irresponsible to use one-time money to create new jobs, because it could require lawmakers to make budget cuts next year. 

Lawmakers have about $1 billion more in recurring revenue to spend this year than last year. Much of that money is necessary to keep providing services at their current level as our state’s population grows and inflation drives up prices. Much is needed, too, to increase pay for workers we’re having a hard time keeping on the job or hiring: teachers, for example, and corrections officers and Highway Patrol troopers and social workers and other employees we can’t seem to keep enough of to do the jobs we expect them to do.

Mr. McMaster’s tax cut would eat up $177 million of that $1 billion next year; once it's phased in five years from now, it would reduce state tax collections by $1 billion a year — or nearly 10% of the revenue we would otherwise be collecting. And even then, with a top tax rate of 6%, it would still look like our taxes were higher than they are in most other states.

So we wouldn’t have solved a problem; we would have simply created additional problems, by making it more difficult to provide the services most of us expect our state to provide.

Get a weekly recap of South Carolina opinion and analysis from The Post and Courier in your inbox on Monday evenings.


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